Mutual funds shun stocks of state-run oil marketing firms in May

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Mumbai: State-run oil marketing companies (OMCs) were the large-cap stocks most shunned by mutual funds in May, and it looks like these stocks may be off investors’ radar for a while as more private-sector rivals compete for the business.

Data from investment research firm Morningstar show that state-run OMCs formed 45.87%, or Rs1,576.42 crore, of the large-cap stocks most sold by mutual funds in May. They sold shares of Indian Oil Corp. Ltd and Bharat Petroleum Corp. Ltd worth Rs1,351.81 crore and Rs224.62 crore, respectively.

“For the state-run OMCs, there was a great earnings blast last year. Going ahead, there is a question mark on the locked-up inventory, as oil prices have eased since then,” said Gopal Agrawal, chief investment officer, equities, Tata Asset Management Ltd.

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Brent crude has declined 20.13% year-to-date. It hit a 7-month low of $44.82 per barrel on Wednesday.

Crude oil prices have been sliding due to a supply glut. While there was a recovery in OPEC (Organization of Petroleum Exporting Countries) output in May, US production was also on the rise, exerting pressure on the prices.

“Their (OMCs’) refining margins were best last year. Going ahead, they can be retained or may ease slightly,” said Agrawal.

“We remain wary of the Street’s assumption of robust increase in marketing profitability for downstream PSUs (public sector undertakings) noting risks from rising participation of the private players in fuel retailing business,” Kotak Institutional Equities said in a note on Monday.

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On 9 June, Mint reported that the OMCs lost nearly 12 percentage points of market share in the fuel retailing business to private firms including Essar Oil, Reliance Industries Ltd (RIL) and Shell India in 2016-17.

“The sales volume growth suffered during fourth quarter, in the aftermath of demonetisation and growing competitive intensity, with IOC, BPCL and HPCL (Hindustan Petroleum Corp. Ltd) reporting a fall of 3.5%, 5.3% and 2.8% on year, respectively,” Nitin Tiwari, analyst at Antique Broking, wrote in a report on 5 June.

The increasing competition could spell more trouble going ahead, some analysts say

In a note on 13 June, ICICI Securities said there may be a risk to its FY18 marketing EBITDA (Earnings before interest, tax, depreciation and amortization) estimate for OMCs due to rising marketing costs, discount on digital payments since December, and due to pay hikes and hit from the goods and services tax. Diesel consumption growth has been weak as in the past few months.

“RIL again offering discounts on diesel for some time to boost its throughput per retail outlet cannot be ruled out. Rising domestic sales would mean lower exports and domestic realisation is Rs1.0/l higher than export realisation,” ICICI Securities added.

OMCs are losing nearly Rs1,500 crore a quarter in providing discounts to customers using digital modes to buy fuel.